New York Markets After Hours

Dollar index hits 3-year high on Fed views

WilliamL. Watts

NEW YORK (MarketWatch) — A widely used measure of the dollar’s value rose to a three-year high Friday after stronger-than-expected June U.S. jobs data reinforced expectations the Federal Reserve will soon move to begin slowing the flow of monetary stimulus to the economy.

The ICE dollar index
DXY, -0.07%
which measures the U.S. unit against six other major currencies, closed at 84.449, up from 83.291 late Thursday in North America. That’s its highest since July 2010, according to FactSet. The WSJ Dollar Index
BUXX, -0.01%
a rival gauge with a slightly wider comparison basket, rose to 76.23 from 75.56.

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the dollar index hit a 3-year high after the June U.S. jobs report.

The euro
EURUSD, +0.04%
changed hands at $1.2828 on Friday, after dropping to an intraday low at $1.2806 — its lowest level since May — after the Labor Department said the economy added 195,000 jobs in June. Economists had forecast a rise of 155,000. The unemployment rate was unchanged at 7.6%. The euro traded late Thursday around $1.2916.

“We would appear to be one step closer to the Fed tapering its bond purchases, which we still see as being announced at the September FOMC meeting,” said John Ryding, economist at RDQ Economics, in a note.

Investors will look for more clues about tapering in the release of the FOMC’s meeting minutes next Wednesday.

Europe week ahead: Look to China

(4:25)

The debate over when the U.S. Federal Reserve will start to withdraw liquidity will continue to rage, especially with the European Central Bank and the Bank of England turning more dovish. But the focus will shift to China and the impact it is having on global growth.

“The market will look for any clarity on the determination of timing for the actual decision, and whether that may also involve any intermediate thresholds or other criteria,” said Geoffrey Yu, strategist at UBS Investment Research, in a note.

As the Fed remains on a path toward scaling back the degree of stimulus it provides the economy, the European Central Bank and the Bank of England on Thursday both took steps to signal they have no intention of tightening policy any time soon. The Bank of Japan also remains firmly committed to aggressive monetary stimulus aimed at reflating the country’s long-stagnant economy.

Higher interest rates tend to make a country’s currency more attractive since they encourage investors to hold bonds and other assets denominated in the currency.

The U.S. dollar
USDJPY, -0.02%
surged from around 100.11 yen ahead of the data to trade at ¥101.18 in recent action, compared with ¥99.80 late Thursday.

The British pound
GBPUSD, +0.01%
dropped, hitting its lowest level since March. It last traded at $1.4894. The pound traded at $1.5071 Thursday when it slid more than 1% against the greenback.

Word from the European Central Bank and the Bank of England that rate hikes aren’t on tap in the near future came ahead of the U.S. jobs data, which the Fed is monitoring as it decides when it will slow the pace of its bond purchases.

Fed Chairman Ben Bernanke said last month that bond purchases, currently at $85 billion a month, may be tapered this year if the economy improves in line with the central bank’s projections. The Fed is looking for the unemployment rate to fall toward 6.5% by next year.

The lack of a drop in the June unemployment rate did little to squelch expectations the Fed will move to begin scaling back stimulus. The underlying pace of payrolls growth should allow the rate to resume its gradual downward march, said Annalisa Piazza, economist at Newedge.

That said, there are still “some doubts on the underlying strength of the U.S. economy,” she said in a note. “We rule out that today’s NFP [nonfarm payrolls] data itself will convince FOMC members that the tapering of the current QE program will be needed sooner than Q3 13.”

Meanwhile, the Australian dollar
AUDUSD, -0.03%
gave up a modest rebound to slip to 90.65 U.S. cents in recent trade, down from 91.09 U.S. cents on Thursday. The Aussie this week fell to its lowest level against the greenback since September 2010 on indication the Reserve Bank of Australia may resume interest-rate cuts.

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